Airport soars to new heights

Airport soars to new heights


Business
Christopher Hindmarsh says Sydney Airport stocks looks attractive for long-term income investors.

Christopher Hindmarsh says Sydney Airport stocks looks attractive for long-term income investors.

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With bond yields on the rise (especially in the US), it has been a tough environment for income seeking portfolios and in particular bond proxy stocks.

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With bond yields on the rise (especially in the US), it has been a tough environment for income seeking portfolios and in particular bond proxy stocks.

Under such an environment it is no surprise to see stocks like Sydney Airport (SYD) coming under some selling pressures as investors fret over the increase in bond yields.

Although government bond rates are a key risk to our investment view, at the current levels SYD is beginning to look attractive.

SYD is an essential infrastructure for the state of NSW and is centrally located, giving it a distinct advantage over future airports.

SYD is an essential infrastructure for the state of NSW and is centrally located, giving it a distinct advantage over future airports...The value and investment growth in SYD continues to be largely driven by increasing international passenger numbers supported by complimentary businesses in retail, parking (and) hotels...

Although a second Sydney airport is a threat, it is yet to be built and will take time to mature in terms of impacting on SYD’s current passenger numbers.

The value and investment growth in SYD continues to be largely driven by increasing international passenger numbers supported by complimentary businesses in retail, parking, hotels and a relatively stable domestic travel environment albeit lower.

International passenger growth continues to impress, although some moderation is expected over the next couple of years.

In 2017, international passengers coming through SYD increased by 7.2 per cent contributing to overall growth of 3.6 per cent (international and domestic) which translated to a staggering 43.3 million passengers.

International growth should be sustained at reasonable levels with increasing planned airline capacity, larger aircrafts, new routes and tourism (with solid growth in tourism coming from China, India, South Korea and the US).

SYD should also be able to further capitalise on the redevelopment of its retail offerings at T1 and T2 terminals with further options of developing the T3 terminal, which was purchased in 2016.

To date SYD has seen good results following its duty free opening and shop completions. SYD Parking is also a high margin business with estimated margins of 70-75 per cent and above 40-45 per cent achieved for non-airport operators.

Outside of analyst forecasts, a real life example is the recent sale by Auckland International Airport of its 24.6 per cent in North Queensland Airport (owner of Mackay and Cairns Airport’s) – sale price of $370m.

Of note, although each airport is unique and therefore can be trading at different multiples, from a valuation perspective the sale price implies a multiple which is far higher than SYDs at this point.

SYD’s forecast dividend yield is now trading around 5.6 per cent and above its 5 year average of 5.3 per cent given the price decline but combined with a strong EPS growth outlook, this looks attractive for long-term income investors.

  • This article does not take into account the investment objectives, financial situation or particular needs of any particular person.  Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
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